Why Rural Hospitals Are Failing: What Bankruptcy Can and Cannot Fix

You can close a hotel tomorrow and kick the guests out if you need to. You cannot do that with a hospital.

That single constraint shapes everything about how healthcare bankruptcy works, and it explains why hospital insolvencies are more complicated, more politically charged, and harder to resolve than almost any other restructuring. The patients do not stop needing care because the balance sheet is broken. The emergency room cannot post a sign saying it is closed for reorganization. And the community that depends on that hospital, often the only one within a reasonable distance, does not have an alternative lined up while the lawyers negotiate.

That is the context in which American hospitals are failing right now, and failing at a rate that should concern anyone who thinks about what a functioning healthcare system actually requires.

The Numbers Are Not Abstract

As of the most recent analysis, 756 rural hospitals in the United States are at risk of closure due to financial problems. More than 40 percent of those face what analysts classify as immediate risk, meaning their financial reserves could cover operating losses for two to three years at most. Roughly 46 percent of rural hospitals are currently operating in the red. From 2010 to 2023, the country saw 108 more acute care hospital closures than openings. In 2024 alone, 25 hospitals closed. By mid-2025, the pace had already exceeded the prior year.

These are not marginal facilities. Most rural hospitals are the only hospital within a meaningful distance for the communities they serve. When one closes, the next nearest emergency room might be 45 minutes away. In a cardiac event or a difficult labor, 45 minutes is not a logistical inconvenience. It is a life-or-death variable.

The maternity ward data is particularly pointed. Since 2020, more than 116 rural labor and delivery units have closed. Only 41 percent of rural hospitals now provide maternity services at all. In roughly a third of U.S. counties, there is not a single obstetric provider or birthing facility. Women in those counties drive to deliver. Some do not make it in time. That is not a healthcare policy abstraction. That is what the numbers actually mean on the ground.

Why Hospitals Fail: The Financial Structure Is the Problem

The standard explanation for rural hospital distress focuses on Medicaid reimbursement rates, and that is part of the story. But it is not the whole story, and the part that gets missed matters.

About half of the services at the average rural hospital are delivered to patients covered by private insurance, including employer-sponsored insurance and Medicare Advantage plans. It is what those private payers pay, not what Medicaid pays, that most directly determines whether a rural hospital loses money. The reimbursement rates that private insurers set for rural hospitals are frequently below the actual cost of providing care. The hospital cannot negotiate from a position of strength because it does not have the patient volume or the system scale to push back.

At the same time, rural hospitals carry fixed costs that do not scale down with patient volume. Staffing a hospital, paying doctors and nurses and technicians, maintaining equipment, keeping the building code-compliant and the systems running, those costs exist whether the emergency room sees 50 patients a day or 15. A rural hospital with declining population, with patients leaving for care in larger cities, with a payer mix that does not cover its costs, is running a structural deficit that has nothing to do with management quality. The math does not work even when the people running the place are doing everything right.

The labor cost pressure of the past several years has made this worse. Travel nurse contracts, which became a fact of life during and after the pandemic, cost multiples of what permanent staff cost. Rural hospitals, which already had difficulty attracting and retaining clinical staff at competitive wages, found themselves paying crisis rates to keep units open. Those costs did not normalize when the acute phase of the pandemic ended. They became embedded in operating budgets that could not sustain them.

Add to that the aging infrastructure of many rural facilities, the capital investment required to maintain them, the cost of regulatory compliance with an expanding body of federal and state requirements, and the picture becomes clear. Rural hospitals are not failing because someone made bad decisions. They are failing because the financial structure of American healthcare does not work for low-volume, high-fixed-cost providers in communities that cannot generate the patient density to sustain them.

What Steward Health Care Showed the Field

The largest hospital bankruptcy in decades was not a rural hospital. Steward Health Care, which filed Chapter 11 in May 2024 with $9.2 billion in liabilities, was a multistate hospital system operating 31 hospitals across eight states. But what happened to Steward is directly relevant to the rural hospital problem, because Steward’s hospitals were predominantly community hospitals serving exactly the kinds of populations that rural and small-city facilities serve.

Steward was acquired by a private equity firm in 2010. The model was familiar: acquire hospitals, sell the real estate through sale-leaseback transactions to generate cash, use that cash and leveraged debt to expand, and extract returns while the operator runs the underlying business. The real estate went to Medical Properties Trust. The hospitals stayed in place but now owed rent on buildings they used to own. This isn’t new. The hospital whose surgeons prolonged my life in 2015, Crozier Chester Medical Center outside of Philadelphia, once home to a world class cardiology team and a world-class burn unit, went into bankruptcy and was bought by a private equity firm. The hospital is long since closed; I’m told we might get an urgent care and condominiums out of that property now.

That structure works until it does not. When Steward’s hospitals could not generate enough cash to cover both operating costs and lease obligations, and when reimbursement pressure and labor costs tightened the margin further, there was nowhere to go. By 2024, Steward could not pay its vendors. Supplies were running short. Patients were being transferred. Five hospitals ultimately closed, roughly 5,000 workers were displaced, and communities across Massachusetts, Florida, and Ohio lost access to care that had been available to them for generations.

The private equity ownership history is part of the story but it is not the whole explanation. The deeper issue is that a hospital system that strips out equity through real estate transactions has no cushion when operating conditions deteriorate. The margin of safety that ownership of the underlying assets would have provided was gone. What remained was a highly leveraged operating company with no room to absorb losses.

Steward’s private equity sponsor had extracted roughly $800 million during its ownership. The communities whose hospitals closed got nothing. That asymmetry is worth naming.

Why Hospital Bankruptcy Is Different

Healthcare bankruptcy does not work like other restructurings, and anyone who approaches it without understanding the regulatory overlay is going to run into problems quickly.

The regulatory complexity is layered. Federal conditions of participation, state licensing requirements, certificate of need laws in states that have them, credentialing requirements, billing and coding compliance, HIPAA, EMTALA, which requires hospitals to treat patients regardless of ability to pay. All of it continues to apply during a bankruptcy. The hospital cannot simply reject contracts it does not like if those contracts are with physicians who have staff privileges and whose credentialing is tied to the facility. Patient records cannot simply be abandoned because they are inconvenient assets. Medical waste, controlled substances, radiological materials: all of it has regulated disposal requirements that do not pause because the case is in Chapter 11.

State governments also become active participants in ways that creditors and trustees in other industries would find unusual. When a hospital in a state faces closure, the state health department, the attorney general, and sometimes the governor’s office are in the room. In Massachusetts, during the Steward proceedings, state officials described going to what they called “bankruptcy school” to understand the process well enough to protect their constituents. That is not how a hotel or a retailer restructures.

Some states require advance notice before a hospital can file for bankruptcy. Others require regulatory approval before a hospital can be sold or closed. In New York, for-profit hospitals are effectively prohibited, meaning the regulatory and governance constraints on any transaction are fundamentally different from what they would be in Texas or Florida.

None of this means hospitals cannot restructure. It means the restructuring process is longer, more complicated, involves more constituencies, and requires advisors who understand both the legal mechanics and the operational and regulatory realities of healthcare. A hospital that is being sold in a Chapter 11 proceeding is not like a retail chain selling store leases. The buyer needs to be licensed. The transfer needs regulatory approval. The physicians need to be credentialed at the new entity. The patients need continuity of care throughout. That is a different kind of transaction.

What Is Coming Next

The legislative landscape is making this harder. The One Big Beautiful Bill Act, signed in 2025, is projected to reduce Medicaid spending in rural areas by approximately $137 billion over ten years. Rural hospitals in Medicaid expansion states are expected to see their Medicaid revenue drop by close to 10 percent on average, while uncompensated care costs could increase by more than 35 percent. Enhanced premium tax credits under the ACA expired at the end of 2025, which means fewer insured patients and more uncompensated care flowing into hospitals that are already operating at a loss.

The math that was already difficult just got harder.

The hospitals that will feel this first are the ones that were already barely making it: low-volume rural facilities, critical access hospitals, urban safety-net providers in high-Medicaid markets. The ones that close will not be replaced. Once a rural hospital closes, the investment required to reopen a facility, hire and credential staff, rebuild community trust, and restart operations is prohibitive. The infrastructure, once gone, tends to stay gone.

The structural question the field will be working through in the next several years is what happens to the communities whose only hospital disappears. Some states are experimenting with alternative models: rural emergency hospitals, which provide emergency and observation services without inpatient beds, are one approach. Urgent care networks feeding stabilized patients to regional centers is another. Whether those models can actually substitute for a full-service hospital in communities that need trauma care, surgical capacity, or labor and delivery is a question with different answers depending on how rural the community is and how far the regional center is.

The restructuring profession has a role to play in sorting through which hospitals can be saved through reorganization and which cannot. That analysis is not the same as the analysis in other industries. The question is not only whether the business is viable. It is whether the community can survive without it, what alternatives exist, and whether there is a structure that preserves some level of access even if the full hospital cannot continue.

Those are not purely financial questions. But they have to be answered by people who understand the financial reality.

What Chapter 11 Can Do and What It Cannot

Chapter 11 is a tool. In the right circumstances, for a hospital with a fixable balance sheet and a viable underlying operation, it can shed unsustainable debt, renegotiate leases, reject unprofitable contracts, and create a path to something that works. It has done that for community hospitals. It can do it again. The specific strategies available, from debt restructuring and revenue cycle management to service line rationalization and sale-leaseback unwinding, are worth understanding in detail; I covered them in Financial Restructuring in Hospitals: A Path to Stability and Sustainability.

What it cannot do is make an unviable business viable. A hospital serving a population that cannot generate enough patient volume to cover fixed costs, in a reimbursement environment that pays below the cost of care, with no prospect of either of those things changing, is not a reorganization candidate. It is a closure in slow motion. Chapter 11 can make that closure more orderly and provide better outcomes for creditors, employees, and the community than a sudden shutdown would. That is real value. But it is not the same as a turnaround.

The cases worth watching are the ones in the middle: hospitals with structural financial problems that are addressable, where the underlying community need is real and the demand exists if the cost structure can be reset. Those are the cases where experienced restructuring advisors, working alongside regulators and community stakeholders, can actually make a difference. Not by pretending the math is better than it is. By figuring out what is actually there to save and building the plan around that reality.

That is harder work than confirming a plan that looks good on paper. It is also the work that matters.

For more on how restructuring advisors approach distressed organizations in regulated industries, visit Gavin/Solmonese’s bankruptcy and fiduciary services and company-side advisory services.